Joint Production in Teams

Abstract

Consider Holmstrom's moral hazard in teams problem when there are n agents, each agent i has an a(i)-dimensional strategy space and output can be m-dimensional. We show that a compensation mechanism that satisfies budget balance, limited liability and implements an efficient allocation generically exists if and only if Sum_a(i)/(n-1)< m. When this condition is satisfied, the optimal mechanism discourages collusive behavior and, under a weak condition, filters out inefficient equilibria.

Keywords: Teams, moral hazard, incentives, theory of the firm

JEL Classification: D23, D82, J33, L23